US may extend debt purchase: PBOC adviser

BEIJING’S CONCERNS:China’s foreign minister said he hoped that the US would behave responsibly so as to safeguard other nations’ American assets

Bloomberg

The US Federal Reserve may extend its program to purchase the nation’s debts and stabilize long-term interest rates after Standard & Poor’s downgraded its credit rating, according to an adviser to China’s central bank.

The Fed will roll out quantitative easing 3, a tactic to purchase treasuries, Li Daokui (李稻葵), an adviser to the People’s Bank of China (PBOC), wrote in his microblog weibo.com.

Institutional investors will be forced to sell long-term US debt, which may cause financial turbulence, he wrote.

S&P lowered the US’ rating one level to “AA+” from “AAA” for the first time on Friday while keeping the outlook at “negative,” citing the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits. The rating may be cut to “AA” within two years if spending reductions are lower than agreed to, said the New York-based rating firm.

The US must address its “structural debt problems” and ensure the safety of China’s dollar assets, China’s Xinhua news agency said in a commentary on Friday. China is the biggest holder of US debts.

“The days when the debt--ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered,” Xinhua said.

Chinese Foreign Minister Yang Jiechi (楊潔箎) said on Friday the risk of a US sovereign debt default is increasing, according to an interview he gave to Polish media and posted on the ministry’s Web site.

Yang said he hoped the US would conduct a “responsible” monetary policy and guarantee the security of other countries’ US assets.

Credit rating agencies should have the courage to speak the truth, Li wrote in his blog.

The lowering of US long-term debt by S&P is “reasonable,” because US politics may repeatedly cause crises over the debt limit and budget, sacrificing the country’s ability to pay its debt, Li wrote.

China’s Dagong Global Credit Rating Co cut the US’ sovereign rating one level to “A” from “A+” on Wednesday, saying the agreement to raise the debt ceiling will precipitate a crisis in the nation.